Socially Responsible Shareholdership in Canada
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Shareholder proposals


Shareholder proposals, also known as shareholder resolutions, are the means of ensuring that the ultimate control of a public company rests with the owners of that company's stock. It is a long-standing legal right of shareholders to formulate proposals for a change in corporate policies and actions, circulate them to other shareholders, and vote on them at the company AGM.

Note re jurisdiction of incorporation

This handbook concerns itself primarily with the Canadian scene. Other countries have differing laws and legal institutions - the United States, for example, has its Securities Exchange Commission (SEC), an oversight body that has no national counterpart in Canada. In Canada, in addition to the federal statute for nationally-incorporated businesses called the Canadian Business Corporations Act (CBCA), each province has its own set of laws regulating the activities of companies that are incorporated within that province's jurisdiction. While the majority of the provincial statutes are substantially the same as the CBCA, there are differences in details. This Handbook's legal references are based on the CBCA, therefore the reader should consult the appropriate regulatory acts that apply to the targeted corporation, should it be incorporated in any jurisdiction other than federal.

See Appendix D: Related Laws and Regulations - http://www.socialinvestment.ca/shareholdership/lawlinks.html for links to federal and provincial laws.


The proposal and supporting statement

 The proposal, generally in the form of a request or recommendation, is a proposed action, or set of actions, that will be implemented by the company to resolve the issue at hand. It is written in terms that allow the requested results to be monitored and independently verified. For example, the phrase "by the next AGM, the company will produce a written report on toxic waste disposal procedures, with a set of recommendations on how to decrease risk of accidents" is preferable to "the company will address the problem of toxic waste disposal".

The supporting statement, which usually accompanies the proposal, is a few paragraphs explaining the issue and justifying the need to address it. It will need to contain quite succinct arguments, bolstered by facts, if it is to convince other shareholders that it is reasonable. It is useful to include a website address to point interested shareholders to an online source that contains much more information on the issue.

The resolution and supporting statement should make a succinct business case, not just a moral one, with wording that clearly indicates a positive effect on the value of shares, perhaps not immediately, but over the long term. Together, the proposal and supporting statement must not exceed 500 words.

getting legal advice

Prior to being filed with the corporate secretary, the proposal should be vetted by a lawyer with expertise in corporate law relating to shareholder resolutions. This will ensure that the wording and format is sufficient to withstand the careful scrutiny of company lawyers who may be seeking justification for rejecting the proposal.


Eligibility

 To be eligible to submit a proposal, an investor must be a registered shareholder, i.e., listed in the official registry of a corporation's shareholders, or a beneficial shareholder, i.e., the real owner of a company's shares, who enjoys the benefits of ownership, such as income, even though such ownership may be held in the registered name of an investment dealer.

Investors must also hold the right kind of shares, generally common shares. There are generally two main types of shares – preferred and common. Preferred shares are usually those that pay a fixed dividend and whose owners are allowed a claim on a portion of the equity upon dissolution of the company. They typically do not have voting privileges. Common shares frequently pay a dividend that is set each year by the board of directors and are worthless in the case of company bankruptcy. Check the articles of the corporation to determine their types of shares and the voting privileges associated with each.

Owners of common shares are allowed to submit proposals presented at annual and special meetings of shareholders, with two key stipulations:

1. shares must meet the minimum share requirement

that is equal to 1% of the total number of the outstanding voting shares of the corporation, as of the day on which the shareholder submits a proposal;
or
whose fair market value, as determined at the close of business on the day before the shareholder submits the proposal to the corporation, is at least $2,000

and

2) shares must have been held for the six-month period immediately before the day on which the shareholder submits the proposal.

Note: an investor's proposal may also be co-filed by other supportive investors, meeting the share-ownership requirements in the aggregate.


Sample proposal: Sears Canada Buying Policy



2002 RESOLUTION ON SEARS CANADA BUYING POLICY

Whereas

The Company's shareholders are concerned about the potential for adverse financial effects on the Company and shareholder value as a consequence of failure to effectively monitor working conditions in facilities where the Company's goods are produced. Consumer boycotts, worker lawsuits, and divestiture or avoidance by institutional investors are often the response to revelations of abusive working conditions.

Violations of fundamental labour standards are widespread in the apparel manufacturing sector globally.

Fifty-five percent of Canadians consider conditions of production in purchasing decisions (CROP Survey, 1998) and 44% said they had boycotted a corporation's products or services in the previous year because of concerns about their ethics (Ipsos-Reid, 2000).

Many investors have adopted responsible workplace and contractor guidelines for investment. The largest public pension fund in the U.S., $170 billion CalPERS, has criteria for its investments in emerging markets based on the International Labour Organization's fundamental workplace rights.

Assurance that our Company has an effective code of conduct will increase its attractiveness to investors and consumers. Alternatively, uncertainty about the effectiveness of the Company's policy suggests that potential liabilities may be associated with Company activities.

Resolved

That the Shareholders ask the Board of Directors to do the following:

1. Amend the Sears Canada Buying Policy and standard purchase contracts to reflect fully the principles contained in the International Labour Organization (ILO) Declaration on Fundamental Principles and Rights at Work;

2. Establish an independent monitoring process that assesses adherence to the amended Policy;

3. Report annually in writing on adherence to the amended Policy through an independent and transparent process, the first such report to be completed by January 2003.

Supporting Statement

The definition of rights in credible codes of conduct is based on the ILO Declaration, which was developed through a tripartite process involving business, labour and governments, has been ratified by Canada and endorsed globally, and has been echoed in other agreements such as the OECD's Guidelines for Multinational Enterprises.

The ILO Declaration provides for:
  • Freedom of association and effective recognition of the right to collective bargaining;
  • Elimination of all forms of forced or compulsory labour;
  • Effective abolition of child labour; and
  • Elimination of discrimination in respect of employment and occupation.
Sears' Buying Policy does not include key elements of the ILO Declaration. Sears' position that it complies with applicable laws is insufficient because in many countries these laws are either poorly enforced or weaker than internationally adopted standards. Labour standards may be the purview of governments, however consumers and investors look to the company when workplace issues impact on corporate performance. Higher standards than those required by some governments are necessary to protect investors.

An effective code of conduct that protects the Company and its shareholders from adverse financial consequences would provide for:
  • An independent and transparent monitoring program involving local religious, human rights and workers' organizations that are independent and well-respected;
  • A transparent reporting process;
  • Incentives, rather than premature termination of contracts, to encourage suppliers to raise labour standards.

Source: Shareholder Association for Research and Education (SHARE)
http://www.share.ca/assets/docs/2002proposal.pdf


Filing the proposal

 The proposal must be submitted to the Corporate Secretary at least 90 days before the anniversary date of the notice of meeting that was sent to shareholders in connection with the previous AGM. That exact deadline date for the following year's submissions is required by law to be stated in the present year's management proxy circular. This allows sufficient time for it to be vetted by management, printed and distributed.

The proposal submission, to be delivered in person, or sent to the Corporate Secretary via registered courier, should include the following items:
Keep the record of receipt of delivery as well as a copy of the submission for your own records (as you should for all your correspondences with the company). Also see to it that all filers and co-filers maintain at least the minimum prescribed number of shares right up to the time of the AGM. This is a legal requirement to ensure that they will be able to attend the AGM and present the proposal. Note also that the bylaws of different companies may require different procedures regarding AGMs and proxies– it is wise to check the bylaws beforehand.


Reasons for refusal of resolution

 A company has up to 21 days after receiving a proposal (or after receiving subsequent proof of share ownership, as the case may be) to notify the submitter of its refusal to include a proposal in a management proxy circular and the reasons for it.

There are many reasons that an unsympathetic management can use to legally justify such refusal, according to Section 137(5) of the CBCA:

(a) the proposal is not submitted to the corporation at least ninety days before the anniversary date of the notice of meeting that was sent to shareholders in connection with the previous annual meeting of shareholders;

(b) it clearly appears that the proposal is submitted by the shareholder primarily for the purpose of enforcing a personal claim or redressing a personal grievance against the corporation or its directors, officers or security holders;

(b.1) it clearly appears that the proposal does not relate in a significant way to the business or affairs of the corporation;

(c) not more than two years before the receipt of the proposal, a person failed to present, in person or by proxy, at a meeting of shareholders, a proposal that at the person's request had been included in a management proxy circular relating to the meeting;

(d) substantially the same proposal was submitted to shareholders in a management proxy circular or a dissident's proxy circular relating to a meeting of shareholders held not more than five years before the receipt of the proposal and did not receive the following minimum amount of support at the meeting;

(i) 3% of the total number of shares voted, if the proposal was introduced at an annual meeting of shareholders;

(ii) 6% of the total number of shares voted at its last submission to shareholders, if the proposal was introduced at two annual meetings of shareholders; and

(iii) 10% of the total number of shares voted at its last submission to shareholders, if the proposal was introduced at three or more annual meetings of shareholders;

or

(e) the shareholder rights regarding proposal submissions are being abused to secure publicity.

If a person who submits a proposal fails to continue to hold or own the prescribed number of shares (i.e., 1% or $2,000) up to and including the day of the meeting, the corporation is not required to circulate any further proposals submitted by that shareholder for any meeting held within a subsequent two-year period.

Five percent for board member nomination

A final reason for rejection has to do with one particular type of proposal. Any proposal that nominates a member of the board of directors must be submitted by one or more shareholders who collectively own at least 5% of the shares of the company. Should this threshold not be reached, the proposal will be refused.

Should the proposal be rejected by management, one can either take the matter to court or distribute a dissident proxy circular. Both of these options can require substantial financial resources.


Going to court

 Although it has the power to refuse a proposal, a company may also petition a court for an order permitting it to omit the proposal from the management proxy circular. Conversely, a shareholder whose proposal has been rejected by management can apply to the court to restrain the holding of the AGM, potentially until satisfaction is obtained. The financial burden of mounting a court challenge can be quite onerous, and since corporations generally have more financial resources than shareholders, such a challenge should not be lightly undertaken.


Dissident proxy circular

 Should management refuse to circulate a shareholder proposal, and going to court is not a viable option, the only route left is to circulate your proposal via a dissident proxy circular. Dissident circulars are distributed independently of the proxy circular put out by company management and can be quite costly in the case of a large corporation with thousands of shareholders. Dissident circulars, in legally prescribed form, must be sent to the shareholders, the auditor, the directors of the corporation, the corporation, and to the Director of the Canada Business Corporations Act (CBCA). As the formal requirements relating to the circulation of dissident proposals are somewhat complex, it would be wise to seek legal advice before embarking on this route.


Proxy solicitation and shareholder communication

 In many cases, investors who wish to solicit proxies can do so without having to resort to either distributing a dissident proxy circular or acquiring an official exemption from issuing one. This is allowed only

Apart from the above legal allowances of proxy solicitation, investors may further communicate with other investors on proposals and proxy votes, stopping short of what Section 147 of the CBCA refers to as “solicitation”, a definition that includes:

(i) a request for a proxy whether or not accompanied by or included in a form of proxy,
(ii) a request to execute or not to execute a form of proxy or to revoke a proxy,
(iii) the sending of a form of proxy or other communication to a shareholder under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy, and
(iv) the sending of a form of proxy to a shareholder under section 149 [i.e., via the management proxy circular];

but does not include

(i) the sending of a form of proxy in response to an unsolicited request made by or on behalf of a shareholder,
(ii) the performance of administrative acts or professional services on behalf of a person soliciting a proxy,
(iii) the sending by an intermediary of the documents referred to in section 153 [i.e., an investment dealer holding registered shares on behalf of their beneficial owner]
(iv) a solicitation by a person in respect of shares of which the person is the beneficial owner,
(v) a public announcement, as prescribed, by a shareholder of how the shareholder intends to vote and the reasons for that decision
[prescribed circumstances include:
(a) a speech in a public forum; or
(b) a press release, an opinion, a statement or an advertisement provided through a broadcast medium or by a telephonic, electronic or other communication facility, or appearing in a newspaper, a magazine or other publication generally available to the public],
(vi) a communication for the purposes of obtaining the number of shares required for a shareholder proposal under subsection 137(1.1) [i.e., soliciting co-filers of a proposal], or
(vii) a communication, other than a solicitation by or on behalf of the management of the corporation, that is made to shareholders, in any circumstances that may be prescribed [mostly in cases where no proxy is solicited - see Section 68(1) of the CBCA Regulations for more details].

It can be seen that there is a great deal of leeway in communicating with other investors, provided that proxy votes are not solicited outside of legally prescribed circumstances.

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